Report by the Supply Chain Finance Observatory, Politecnico di Milano School of Management
The Observatory Supply Chain Finance of the Politecnico di Milano held its fifth annual congress on March 15, at the Carassa-Dadda hall on the Bovisa Campus. The SCF Observatory, representing the main academic viewpoint in Italy on supply chains, has strengthened over the years through its collaboration with the SCF Community and other leading European universities interested in this topic.
The congress opened with an introduction from Prof Alessandro Perego, head of Politecnico di Milano’s school of management and scientific director of the Digital Innovation Observatories, who observed that understanding the dynamics of supply chains has become one of the main goals of financial institutions. At the same time, individuals involved in supply chain functions have developed their knowledge about financial flows in a global optimisation perspective.
This year’s event comprised six main sessions: the SCF market; fintech opportunities; digitalisation and innovative solutions; information exchange and credit merit assessment; SCF beyond working capital; and SCF trends and internationalisation.
Prof Federico Caniato, director of the SCF Observatory, opened the SCF market session with an overview of the Italian landscape in 2016 against the previous year. Based on the receivables of more than 740,000 Italian companies in 2016, it emerged that the potential SCF market is worth around €637 billion – an impressive number but significantly less (down by 9.8%) from 2015. With inventories at €458 billion and payables at €635 billion, it results in a net operating working capital for the year of €460 billion.
A breakdown of the market by categories in 2016 confirms that the majority of business is made up by invoice discounting and factoring, but the dynamism being created by innovative solutions – driven by reverse factoring, invoice trading, dynamic discounting and purchase order finance – continues to accelerate. This is already evident in preliminary results for 2017 and is poised for further growth this year. Figure 1 below shows Italy’s potential and served SCF markets in 2016:
Figure 1: Potential and served SCF market in Italy
Italy also represents the single most attractive market in Europe; its €637 billion representing around 14% of the region’s market that at the end of 2016 had a total worth of about €4500 billion. Of this figure, Europe’s six leading economies represent around 60%, as shown in Figure 2:
Figure 2: Potential SCF Market in Europe (on 31/12/2016)
The SCF market session continued with presentations by Dr Giorgio Zagami, head of procurement at tour operator MSC Cruises and Dr. Mariano Negri, CEO of automotive engines group Costruzioni Motori Diesel (CMD), who described the SCF solutions developed by their company to provide comprehensive support for the supply base.
Caniato opened the the fintech opportunities session by introducing Rony Hamaui, former president of financial services group Associciazione Italiana per il Factoring – aka Assifact – with which the SCF Observatory is partnering on research into SCF start-ups. This has identified four basic business models:
- Cash seeker: these create a match between cash demand and funding offers, connecting private and institutional investors who seek opportunities with companies that struggle to access liquidity via the traditional financial channel.
- Cash exploiter: who who are ready to foster supply chain efficiency by exploiting excess cash at various points along the supply chain, which can be used to optimise financial flows.
- Working capital broker: this group provide short-term liquidity through traditional solutions to selected high-profile, low-risk companies, with financing provided by some institutional investors.
- Compass: or providers of tools to reduce information asymmetry along the supply chain; enabling a simpler and quicker evaluation of creditworthiness or the adoption of SCF solutions.
The session on digitalisation and innovative solutions offered the experiences of IT innovator NTT Data, as described by its CFO Dr Paolo Marinelli. He described the highly digitised reverse factoring solution that allows the company’s suppliers to be paid in as little as five days, with several benefits also in terms of overall supply chain efficiency.
The innovation scene
Antonella Moretto, co-director of the SCF Observatory, took the stage next to provide an overview of innovative SCF solutions, focusing on purchase order financing; dynamic discounting; and equipment finance.
Purchase order finance solutions can be classified according two main variables: the type of goods to be financed, which can be raw materials or final products, and whether a factoring facility is also connected to the solution.
Dynamic discounting solutions can be tailored according to three variables: the cash availability of the buyer; the presence of relational risk; and willingness to involve multiple counterparties beyond the single supplier-single buyer relationship. Equipment finance solutions represent a potential solution to tackle the long payment terms of public administration, with a supplier who can decide to take a partnership – either long-lasting or spot – is with a financial institution to participate on public tenders. As for the private sector, the most diffused equipment finance solutions identified are based on alternative leasing agreements.
The information exchange and credit merit assessment session focused on providing delegates with the potential benefits of information sharing between the various departments within a company and along the supply chain, not only in terms of cash flow optimisation but also in terms of risk mitigation.
Dr Davide Errico and Ds Antonietta Valentino from the Europe, the Middle East and Africa (EMEA) division of household appliances group Whirlpool, explained the benefits to risk management of constantly monitoring the financial and operating performances of the supply base. Dr Mario Bianchi, head of risk management at BASF Italy, highlighted the value of collaboration between the company’s credit and sales teams, in developing SCF as a commercial tool for their clients.
Other session speakers were Dr Stefano Ciotti, counsellor at the Italian Association of Credit Managers (ACMI) and Dr Mattia Ciprian, president of credit rating agency modeFinance. They described their ongoing project aimed at creating a platform to foster sharing non-confidential and undisclosed information between different credit managers operating in the same supply chain.
The session concluded with Antonella Moretto showing that monitoring operating variables such as the frequency of payments or the punctuality of delivery may help to capture early signals of financial difficulties at a company that may precede a default. In particular, deterioration in the frequency of payments typically occurs 12 months before the default, while worsening punctuality of delivery can be found over 18 months before the default.
The SCF beyond working capital session was distinguished by two interesting company case studies, offering a set of alternative solutions that companies could consider when looking for financing and moving the perspective from traditional financial players to an open market perspective.
Dr Davide Ferrazzi, senior expert for capital markets and private equity at the Italian Banking Association (ABI) introduced a case study in which companies belonging to the same supply chain decided to collaborate in issuing financial obligations with the aim of securing financing through an alternative channel: the market.
Dr Andrea Vezzani, CFO of electric motorcycles pioneer Energica Motor Company, described how the issuance of financial obligations represented the best way for innovative start-ups as Energica to overcome an imbalance in terms of working capital, given the obstacles to accessing liquidity through the traditional channel.
The event concluded with the SCF trends and internationalization session. Michiel Steeman, executive director of the SCF Community, took the stage and captured the audience with an overview of what is happening in China, and how the “Shenzhen Revolution” is poised to disrupt the dynamics of the worldwide physical and financial supply chains.
Prof Caniato had the challenge of summarising the key messages that had emerged from the past year of research and together with the insights from the fifth annual congress, to identify the current main drivers of SCF. Four main themes emerged:
- Technological: There is evidence of several concrete applications developing, particularly in terms of blockchain, artificial intelligence (AI) and the Internet of Things (IoT).
- Cultural and managerial: SCF is now established as a widely-used term, both inside the various departments inside a company and among players far removed from the world of finance.
- Expansion: SCF has grown beyond traditional receivables financing, with increasing interest from stakeholders in the financing of orders, inventories and fixed assets.
- International: The most innovative solutions identified are mainly diffused outside Italy, putting the onus on Italian players to contribute in developing these new solutions and best practices to support the always more internationalised supply chain.